Two million additional micro, small and medium enterprises (MSMEs) in India will become eligible to opt out of the goods and services tax (GST) system from the beginning of the next financial year, the GST Council decided on Thursday.

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The Council took a slew of measures for MSMEs by increasing the annual turnover threshold for exemption from GST registration to Rs 40 lakh from the current Rs 20 lakh, introducing a composition scheme for services, easing return filing procedures, and raising the composition threshold for traders and manufacturers. However, for services providers, the threshold remains the same at Rs 20 lakh.

The revenue impact of this move is estimated to be more than Rs 6,000 crore on an annual basis.

The Council permitted Kerala to impose the calamity cess of up to 1 per cent for a maximum period of two years, Union Finance Minister Arun Jaitley told reporters after the meeting.

However, it referred the much-awaited decision on reducing the GST rate on under-construction property and lotteries to two groups of ministers (GoMs).

There was no decision on cutting the 28 per cent rate on cement. Jaitley said, “Any decision on cutting GST rates on individual items will be taken only when revenues improve."

For the Northeast and hilly states, the threshold will be raised from the current Rs 10 lakh to Rs 20 lakh on April 1. But, they will have an option to “move up" to the Rs 40 lakh threshold.

Prime Minister Narendra Modi had expressed a view that the threshold needed to be increased to Rs 75 lakh.

“Increasing the threshold to Rs 40 lakh instead of Rs 75 lakh as speculated is better because while we need to provide relief to small taxpayers, it is equally important to expand the tax base," said Pratik Jain, partner, indirect tax, PwC India. The decision is likely to have been taken on the basis of the data that only 1.1 million of the roughly 5 million GST filers below a turnover of Rs 20 lakh pay the GST, contributing only 1.5 per cent of overall GST collection.

Companies with a turnover of Rs 20-40 lakh form 20 per cent of GST filers and contribute less than 3 per cent of overall collection, officials told Business Standard.

“Of the GST filers with a turnover of Rs 20-40 lakh, only those whose cost of compliance is higher than the tax they pay will opt out. Most of them are likely to stay in the system owing to the availability of input tax credit," Revenue Secretary Ajay Bhushan Pandey said.

In a first, a composition scheme was introduced for small service providers with a turnover of up to Rs 50 lakh per year, with a GST rate of 6 per cent (3 per cent each to the Central and State GST).

Experts said while such a scheme would be beneficial for companies providing electrical and other household services, businesses such as beauty parlours, whose rental cost is high, would not opt to save the available input-tax credit.

“For services providers, keeping a limit of Rs 50 lakh for registering under the composition scheme and increasing the exemption threshold to Rs 40 lakh at the same time do not make much sense for those having a high ITC (input tax credit) available at their disposal," said Abhishek Rastogi, partner of Khaitan & Co.

For goods dealers, the upper limit of turnover to become eligible for the composition scheme will be increased to Rs 1.5 crore from the next financial year. This will not be available for dealers involved in inter-state trade. Further, composition dealers will need to file GST returns only annually, but pay tax quarterly, from 2019-20.

On revenue mobilisation for post-disaster rehabilitation, the GST Council accepted the recommendations of the ministerial panel headed by Bihar Deputy Chief Minister Sushil Modi, and allowed Kerala to impose a calamity cess of up to a maximum of 1 per cent on the value of goods and services up to a maximum of two years.